Microsoft's radical new business plan is hidden in plain sight

Microsoft's radical new business plan is hidden in plain sight

Summary: Microsoft is reimagining its entire business model, and they’ve laid out the details for anyone to inspect. You just have to read between the boilerplate sections in the company's most recent 10-K.

TOPICS: Software, Microsoft

Every publicly held corporation whose stock trades in the United States is required by the Securities and Exchange Commission to file a detailed annual report (Form 10-K) at the end of its fiscal year.

Call me weird, but I love reading 10-Ks. I especially love reading the parts that make corporate lawyers and executives squirm, because they’re required to divulge details they would never discuss with journalists. And although there’s a fair amount of boilerplate and yadda yadda, there’s also a lot of substance buried in these reports.

For example: Carefully reading last year’s 10-K from Microsoft (MSFT) allowed me to predict in August 2011 that Microsoft was going to get into the hardware business. They validated that prediction with the announcement in June of this year that they plan to enter the hardware business with a new line of devices under the Surface brand name.

I’ve just completed my detailed analysis of Microsoft’s 2012 10-K. My fellow Microsoft watchers picked up one fairly obvious statement from that report—yes, Microsoft acknowledges that the Surface will compete with products from its hardware partners.

But they missed the much bigger story: Microsoft is reimagining its entire business model, and they’ve laid out the details for anyone to inspect.

After carefully comparing last year’s 10-K with this year’s version, I’m comfortable making three predictions.

Services are the cornerstone of Microsoft’s strategy.

In the “Risk Factors” section of its 2011 10-K, Microsoft used the word services 44 times. In this year’s revision, the word appears 73 times.

This section is especially revealing. The underlined text is new this year:


Similar additions are sprinkled throughout the document.

Last year, Microsoft was still tentative about its efforts around cloud services. Despite the bravado of slogans like “We’re all in,” the 2011 10-K admitted that the process was not yet complete: “We are transitioning our strategy to a computing environment characterized by cloud-based services used with smart client devices.”

This year, those qualifiers are gone. The equivalent section has been rewritten and now refers to “our increasing focus on devices and services.” It concludes, “A growing part of our strategy involves cloud-based services used with smart client devices.”

Microsoft has thrown massive amounts of resources at the task of integrating cloud-based services into its flagship products. SkyDrive is a core part of Windows 8. Office 365 services are fundamental to Office 2013. Azure is moving entire server farms into the cloud.

The subscription-based offerings of Office 365 are just a hint of what’s to come.

Surface isn’t a bluff or a hobby.

Some of my ZDNet colleagues think that Surface is a bluff on Microsoft’s part, a way to jolt its hardware partners into delivering interesting products. If you believe that theory, then Microsoft will keep the price of its Surface products high so it doesn’t cannibalize sales from Lenovo and Dell and HP.

That’s not the Microsoft way. And the company telegraphs the importance of Surface by giving it marquee billing at the beginning of the “Risk Factors” section:

An important element of our business model has been to create platform-based ecosystems on which many participants can build diverse solutions.

That’s boilerplate. But what comes next isn’t:

A well-established ecosystem creates beneficial network effects among users, application developers and the platform provider that can accelerate growth. Establishing significant scale in the marketplace is necessary to achieve and maintain competitive margins. The strategic importance of a vibrant ecosystem increases as we launch the Windows 8 operating system, Surface devices, and associated cloud-based services. We face significant competition from firms that provide competing platforms, applications and services. [emphasis added]

Those Surface devices get star billing, sandwiched between Windows (one of Microsoft's core businesses) and its cloud-based services. In that discussion of the ecosystem, there’s absolutely no mention of the hardware partners or their devices.

Later in the same section, there’s another new paragraph that hints that Surface is just the beginning:

We will also continue to invest in new software and hardware products, services, and technologies, such as the Surface line of Microsoft-designed and manufactured devices announced in June 2012.

Elsewhere in the same section, where last year’s report referred to the Xbox 360 console, this year’s report calls out “Surface devices and other hardware devices we design and market.”

The word devices appears 11 times in the “Risk Factors” section of the 2011 10-K. It appears 25 times in the equivalent section this year.

The word hardware appears 8 times in the same section of the 2011 10-K. You’ll find 15 references to hardware in this year’s report.

In the Sinofsky regime, Microsoft isn’t interested in hobbies or side projects. The company’s motto is “Go big or go home.” Earn a billion dollars. Get a billion users. Don't think small.

I expect a massive marketing push behind Surface, and I would be shocked if we don’t see more PC hardware from Microsoft in the next 12 months.

Deal with it, OEMs.

Microsoft plans to pick up the pace. Dramatically.

Microsoft has a reputation for being too slow to respond. This year’s 10-K contains a new section that suggests that’s all about to change:

Many of the areas in which we compete evolve rapidly with changing and disruptive technologies, shifting user needs, and frequent introductions of new products and services. Our ability to remain competitive depends on our success in making innovative products that appeal to businesses and consumers. [emphasis added]

In recent years, Microsoft’s competitors have gotten fat (and maybe lazy) by counting on Redmond to be slow to respond to competitive threats. They just might have awakened a sleeping giant.

Last year, when I did this same exercise, I concluded:

One thing I’ve heard through the years from Microsoft employees is that the company does its very best work when its back is against the wall. Linux may be neutralized as a competitive threat, but Apple and Google are formidable, even existential competitors. The next 12 months promise to be very interesting indeed.

It has indeed been an interesting year. The next 12 months promise to be even more intriguing.

For more insights from the MSFT 10-K, along with some details on how I do this kind of analysis, see: 

Also note that a problem on the ZDNet back end has made it impossible to add comments to this post. Please use the follow-up post to ask questions or leave comments for me. Thanks.

Topics: Software, Microsoft

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  • The Microsoft 10-K in a nutshell:

    We're trying to be Apple.
    • In a way...Yes, and No.

      I believe that Microsoft has to look for areas to grow. MS owns the enterprise and the PC market. It really doesn't have much, if any, growth in that area. They realize they need to find different markets and the consumer space is somewhere which they haven't been dominating. Therefere, by default, MS has to focus on the consumer aspect of their business. Creating their own hardware is just one way of doing this. Somewhat making sure the OS and the hardware meld together like Apple.

      MS did the exact same thing years ago in an existing market that was entrenched with stallwarts. That was something called the XBOX and I suspect MS wants to throw a little XBOX strategy in with Apple strategy, let it cook for a couple years, and see if it's a success or try again.
      • And research

        Microsoft is not trying to be Apple. Apple is built on the certainty of a genius - they didn't bother with market research to decide what product to put out next.
        Microsoft is thoroughly grounded in research. They test every UI, every piece of new technology, every idea. To me, that's a very strong foundation, and that's why Microsoft is so dominant.
        On the other hand, MS has been let down by cheap hardware and poorly written, part incompatible drivers. Someone has to build MS hardware (cue Asus etc) so the former OEM probably won't lose out, but it will work far better
        • Apple was built on the craftiness of an opportunist

          Steve Jobs was more like PT Barnum, an opportunist.

          Barnum did not create the objects of his shows, he just "found them" and charged money to view them.
        • What a joke

          What research? For the vast majority of their existence, the only UI research MS relied on was the Apple Human User Interface Guidelines (still the bible in the field). They barely lifted a finger to do ANY original UI research.
          Nor is this fictitious research why they are dominant. They are dominant because they lucked out, and hitched their train car to the IBM train early on, then leveraged a number of shady, and illegal, deals to protect that position.

          And you last statement is so illogical, in so many different ways, it is hard to even address seriously.
          First, MS hardware is built by ONE OEM, this does nothing for the thousands of others that do not get this largess. Second, since that OEM will already make their own hardware, there is NO reason to conclude that it will "work far better" than that same OEM's other products.
          Third, actually, there is NOTHING stopping MS from NOT using an OEM, and just making it themselves.
          • Apple UI Guidelines - what about PARC?

            Are you saying that Apple invented the graphical UI? If so, please brush up on your history. Apple's UI & Microsoft Windows are both derivatives of the pioneering work done at Xerox PARC in the '70's. As is the Mouse, WYSIWYG, Ethernet & a ton of other research they never really productised in a big way.
            While Apple was easily 1st to market, especially it you are thinking about the date of Microsoft's 1st successful GUI release Windows 3.0 (22 May 1990). It is worth remembering that Windows 1 started development in the early '80's around the same time that apple was developing the "Lisa" (predecessor to the MAC)

            One of the best decisions Apple made in those early years was to base their systems on a 32bit chip (Motorola). The 16bit Intel chips crippled IBM computing so much that GUI was impractical. Evidenced by Win3.0's success. (it was the 1st version to take advantage of the 386 chip.)

            "What research?" Check out In the past 2+ decades MS has funded over $200 Billion in Research. Much of it published publically & available to everyone. Meaning it has become the catalyst for other university PHD research available for all mankind. Some, like Kinect, has been successfully commercialised.

            Yes, the MS strategy of being a catalyst for an ecosystem was key to their success & critical to build the IT business that we know today. It is a much better model that the closed enviroment used by Apple & most others that came before it (ie: IBM, the BUNCH, DEC etc). However it does come with a major disadvantage; the poor quality of 3rd party device drivers are a major cause of system instability which impacted the Microsoft reputation. It also made it hard to keep anything secret till launch.

            So it is unfortunate they will start to compete with their OEM channel. But it will benefit more than one. Just like the XBOX they will use a variety of OEM's; Disk, Memory, Firmware, no-one does it all.
            What would stop MS making it all themselves? They want to be a device supplier not a component manufacturer. Same reason Apple didn't go that way, it doesn't make biz sense to diversify that far.
          • People need to get over PARC

            Yes, PARC existed. And before that, Douglas Engelbart. We all get this, we all know it, and it isn't what the post you responded to was about.

            The Human Interface Guidelines spoken about earlier was a consistent and constant approach to user interface design for a point and click interface: an actual "how to" for Mac developers describing how to build a proper Mac application, so that new applications would be consistent with the OS experience.

            And yes, Windows apps (by Microsoft and others) from Windows 286 through to Windows for Workgroups largely based themselves on the Mac guidelines for application development. PageMaker, for instance, was identical on Windows to its Mac counterpart.
        • What about NIX?

          "On the other hand, MS has been let down by cheap hardware and poorly written, part incompatible drivers. Someone has to build MS hardware (cue Asus etc) so the former OEM probably won't lose out, but it will work far better"

          Linux systems do not have these issues. Nobody pays for them, nobody builds specific hardware for them, and they are not given any special consideration as they do not require any. Despite all of this Linux systems have none of these issues. If Linux was paid software, I know for a fact that it's market share would dwarf either MS or Apple but its not. I still fail to see why anyone should care about either company. I also look forward to Dell pushing Ubuntu hard again in the next 5 years. I would guess that other hardware vendors will try to split up Linux offerings with one (HP?) taking SUSE, and Apple making a large commercial push for Darwin Unix as a commercial server operating system since Red Hat will not abide any more competition.
          James Scollard
      • I don't think Microsoft wants to play the Xbox strategy with its flagships

        After all, Xbox was/is a black hole they toss money into to achieve dominance. With a peripheral product maybe less than sane as an option, but doable. With the main event (Office etc), not really viable at all.

      When Office alone has 1 billion users you have to do some pretty dramatic things to maintain a growth rate that gets respect from Wall street.
      • 1 billion sold?

        Are there 1 billion adults out there that own a computer?
        • A billion Adults

          Maybe, maybe not, but they have kids and they have computers.
        • Why are you so surprised? Not keeping up?

          Recent reports, even on ZDNet/TR, have indicated that, MS has sold over a billion Office licenses.

          Believe it or not, Windows OSes have sold considerably more.

          Time to leave that cave.
          • Many people own more than one license from past versions.

            That doesn't mean there are a billion licenses in use.
          • I'd bet there are more than a billion Windows PCs in use

            around the world, and it could even be much higher.

            The billion number was passed in 2007, and five years later, you can be sure it's a lot higher. In fact, Windows 7 wasn't even launched in 2007, and since then, Windows 7 has sold more than 630 million licenses. The past versions of Windows include XP, which still has a comparable number to Windows 7, and then there are still many millions still using Vista.

            Those licenses don't just get put on a shelf and then forgotten.
          • 0ld versions

            actually those licences expire after a year nowadays - with SA licensing, MS demands you upgrade to the latest version every time. With older "purchased" licences, people do buy new ones when they buy a new version of Office.

            So, yes, a billion licences sold, but not all of them used. How many people do you know that have licences for Windows 3.1 yet no longer run it. Same for licensed copies of Office 97.
          • And MS cares about how many licenses are "in use" why?

            A sale is a sale - MS couldn't care less if you use it, put it on a shelf, sprinkle it with some oregano and serve warm over a plate of noodles...

            You comment is petty quibbling - the percentage of users that buy Office and don't use it wouldn't amount to anything more significant than a rounding error.
        • Wrong metric

          A lot of users use multiple Office licences. I have one at home and one at work to start with. In addition, I work with a couple of scientific institutions, which have Office installed on their multi-user remote desktop servers (and these are separate institutions, so they can't share licences). As a result, I am essentially using at least four licences: one at home, one at work, one at institution A and one at institution B. In addition to that, other users are using Office licences on some of the same machines (the remote desktop servers).

          I don't know how Microsoft's volume licensing works or how they count users of volume licences. However, if you have a single Windows server with Office installed and 10 remote desktop users, that would be one machine with Office installed, but 10 users. If those users also have Office on their local machines (which are not part of the same organisation, so need separate licences), and some have Office at home, it's easy to see how the user base, the machine base and licence base could diverge quite a bit.
          • As an aside

            The slow but steady rise of Windows Server may party explain why Microsoft's Office business has been outperforming their desktop Windows business in recent years.

            Ten years ago, the servers I mentioned would all have been running Unix (a lot of the scientific software was clearly ported from Unix), and MS Office would only have been on the clients. Today, Unix is almost gone. Most servers have been replaced by Windows, except for web servers, which have been replaced by Linux (and even some of those, especially high-security web servers, have been moved to Windows instead).
          • Source?

            Link to some numbers?